Joint Parenting, Joint Retirement Accounts?
More and more these days, young parents approach the responsibility of parenting as a joint venture. Often one parent will reduce her schedule to take care of the children while the other maximizes income for the economic welfare of the family. But tax laws punish these parents by imposing an unnecessary level of financial risk on moms or dads who stay home or reduce their schedule to care for children. How?
Consider the following illustration. My eleven-year-old daughter, Kathy, wants to be a doctor and has as good a chance as her brothers to achieve this dream (close to half of medical school graduates these days are women). But she also wants to be a mother and intends to seek a flexible work schedule to spend time with her children. Consequently, she will probably end up poorer than her brothers or financially dependent on her husband in her senior years. She is likely to pay dearly multiple times for her decision to curtail her work schedule to spend time with her kids. She will not only give up current income, but will also slow the rate at which she develops her career. Finally, she will forego the ability to adequately save for her retirement years in large measure due to an antiquated tax code that is disadvantageous for dependent spouses, the vast majority of whom are women.
Let's assume my daughter's life follows the storyline common to the expectations of many eleven year olds: she gets married, develops a career, and then scales back her employment when she and her husband decide to start a family. Let's also assume that her husband makes enough money to support the family, in other words a traditional American "family values" model. Chances are that when Kathy becomes a new mother, the last thing she'll be thinking about is her retirement plan. After all, in this happy scenario, her husband is making a good salary and is maxing out under his company's retirement plan. He's deferring enough money for the two of them. So the fact that her scaled back hours have an immediate effect on her expected Social Security retirement benefits and that her part-time employment status deters her from paying into her own company retirement scheme doesn't faze her. After all, she and her husband file a joint tax return and have jointly made the decision that he'll be the primary breadwinner while she spends more time with the kids. This is the formula that they think works best for the whole family. So surely the retirement assets they accumulate when they raise their family together are joint assets, right?
Not exactly. Under our current system it is not possible to have retirement savings in joint name. It is also not possible for one spouse to transfer part or all of his retirement plan to the other except in divorce or death. So for better or worse, richer or poorer, in retirement planning the maxim "he who earns it owns it" holds true. Now let's assume that Kathy is financially savvy and is fully aware of the importance of retirement savings. There must be some smart financial planning strategies she could follow to protect herself. Here the IRS rules restrict Kathy's ability to contribute pre-tax dollars to her own Individual Retirement Account (IRA) if her husband earns more than $85,000 per year (tax year 2008) and is paying into an employer sponsored plan like a 401k. In other words, his income impacts her ability to save for retirement with pre-tax dollars even though she has no legal rights to his plan. So the IRS assumes both spouses benefit from retirement money set aside, yet does not allow such assets to be titled jointly in both the wife and husband's names.
Kathy assumes she'll marry and raise children with her husband. If, however, she ends up a single mother, her prospects for saving for retirement grow dimmer. This is because while women without children earn on average an estimated 90 cents for every dollar a man earns, mothers earn 73 cents and single mothers earn around 60 cents (source: www.momsrising.org). The unwritten message in these statistics is that mothers generally put a premium on flexible employment hours so they can raise their children. The consequence is that many are struggling to make ends meet and do not think about putting money aside for retirement.
The economic playing field for caregiver parents (usually mothers) is decidedly slanted. Many recognize that children fare better when they receive parental attention. The caregiver role is important and adds value to the next generation, a benefit not just to individual families, but to society as a whole. Yet all too often parents become increasingly financially vulnerable for every hour they spend with their children.
While there are many reform measures that could be taken to level the financial playing field--like giving parents Social Security contribution credits or tax credits for time they spend rearing their children--a noncontroversial place to start would be to change the law to allow parents to voluntarily choose to have joint retirement accounts. This would allow a husband and wife who believe marriage and parenting are a partnership to put money aside in joint name for their senior years, which means they would be equal owners of the account. Through this arrangement, each spouse would have equal claim to the account's assets and control over his/her financial future.